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BAX Ticks Higher on Buyout Hunch

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Baxter International (BAX - Free Report) is holding talks to acquire Sweden-based medical technology company Gambro AB for about $4 billion, according to a Wall Street Journal report.

Baxter shares rose 4.07% to close at $68.81 on November 26, 2012 amid buyout speculation. The bullish momentum helped the stock soar to a new 52-week high of $68.91 on the aforementioned date. Moreover, the shares posted their highest price since August 2008.

The speculated buyout will enhance Baxter’s kidney dialysis franchise as Gambro is a leading global provider of equipment and therapies for the purpose of kidney and liver dialysis. In 2011, Baxter’s renal portfolio contributed 32% to its Medical Products segment revenues of $7.8 billion. The compounded annual growth rate (CAGR) for the segment is estimated at 4% through 2017. The actualization of the rumor might result in a faster growth profile for Baxter’s renal franchise.

Fresenius Medical Care (FMS - Free Report) is spearheading the dialysis market with a share of roughly 33%, followed by Baxter and Gambro with market shares of 19% and 13% respectively (as of 2011). If the speculation is to be believed, Baxter is set to become a giant in the kidney dialysis market.

The company was on an acquisition spree in 2011. In an effort to expand its available portfolio, Baxter acquired Baxa Corporation, Prism Pharmaceuticals and Synovis Life Technologies. These acquisitions are already having a positive impact on the company’s top-line.

Baxter witnessed cash outflows of $590 million in 2011 for acquisitions and investment compared with $319 million in 2010. This reflects the company’s increasing focus on acquisition strategy to add depth and dynamism to its product portfolio. In our view, an eye on the uncertain economy has led to Baxter resorting to the acquisition route. It is expected that acquisitions will help to harness its strength and diversify its offerings.

Going forward, we do not expect Baxter’s acquisition activity to slacken. Moreover, we expect a significant pick up in collaborations and alliances for the development of pipeline candidates.

About Baxter

Baxter is one of the largest pure-play med tech companies in the world in terms of sales. The news regarding Baxter still remains somewhat mixed. On the positive side, the company’s focus on life-sustaining products which are not commoditized, partly insulate it from an economic downturn.

The company is able to generate recurring revenues and consistent cash flow, due to its focus on chronic diseases. Among other positive factors, Baxter retains a strong product pipeline with several products in late-stage clinical development.

On the flip side, despite resilience in certain sub-segments, we are concerned about relative stagnation in sales, a slightly somber outlook for hospital spending and tightening of reimbursement.

Improved execution has lifted sentiment somewhat toward Baxter. It is a good bet for value investors willing to wait as fundamentals improve further. Among others, the company competes with Becton, Dickinson and Company (BDX - Free Report) in certain niches.

We currently have a long-term Neutral recommendation on Baxter. The stock carries a Zacks #3 Rank, which translates into a short-term Hold rating.

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